Join our community of smart investors
OPINION

Eurozone creaks and groans

Eurozone creaks and groans
February 10, 2017
Eurozone creaks and groans

Italians are falling out of love with the single currency, blaming it for shrinking GDP (which today is still 7 per cent smaller than it was before the financial crisis), 3.1m unemployed, youth unemployment of 40.1 per cent, and just 57.3 per cent in work (one of the lowest in the eurozone). Then factor in that the euphemistically labelled 'black economy' is 20 per cent of GDP (and used in official calculations); Mafia turnover in 2012 guesstimated at €140bn (£119bn) making it the country's biggest business with cash reserves of €65bn.

Meanwhile, the country's banks have admitted to €350bn in non-performing and bad debt. This sorry state of affairs has been reflected in the Milan Bourse's main share index, which peaked at just over 50,000 in the first quarter of 2000 and is now worth less than half of that - with scant technical signs of any imminent improvement. Compare with Germany's Dax index which set a new record high in 2015.

 

 

Over to France where presidential elections conclude on 23 April. This time the Front National, headed up by Marine, Jean-Marie Le Pen's daughter, has a chance of getting through to the final round. She has threatened to re-denominate French government debt into local currency, a whopping €1.7 trillion, something which would seriously blow a hole in the coffers not only of the European Central Bank, but more worryingly commercial ones across the eurozone. Not surprisingly, the spread between the yield on 10-year German and Obligations Assimilables du Trésor are widening with each opinion poll. From as low as just 16 basis points two years ago, the spread now stands at 70, although well below 2012's crisis era 140. Prompting Banque de France governor Villeroy de Galhau to warn that quitting the single currency would 'impoverish' France, the spread still looks too narrow considering the enormity of the risks involved.

 

 

But let's not forget that there are two sides to this spread, where the yield on 10-year German Bunds could turn negative again, matching the record low of minus 20 basis points touched in the third quarter of 2016. And why stop there? Our third chart is the yield on Germany's benchmark two-year Schatz - a staggering minus 79 basis points - just trailing Switzerland's equivalent which was yielding minus 110 at the start of the year.

 

 

Finally, Greek 10-year government paper, currently priced at 70¢ in the euro, is distressed but not close to 2012's default mode. This is not nearly cheap enough considering the risk of potential exchange controls, limit to cash machine withdrawals, and an International Monetary Fund that is very reluctant to be included in the bailout Troika. Best avoided altogether.